FRANKFURT, Germany (AP) — Saudi Arabia will cut the amount of oil it sends to the global economy, taking a unilateral step to support the plunging price of crude oil after two previous supply cuts by major OPEC+ producers failed. to push oil higher.
The Saudi cut of 1 million barrels per day, due to start in July, comes after other OPEC+ producers agreed at a meeting in Vienna to extend previous output cuts into next year.
Calling the cut a “lollipop,” Saudi Energy Minister Abdulaziz bin Salman told a news conference that “we wanted to put the icing on the cake.” He said the layoff could be extended and that the group “will do everything necessary to ensure stability in this market”.
The new cut is likely to boost oil prices in the short term, but the impact after that will depend on whether Saudi Arabia decides to extend it, said Jorge Leon, senior vice president of oil markets research at Rystad Energy.
The move provides “a low cost because the Saudis can play around with the voluntary cut as much as they want,” he said.
Falling oil prices have helped U.S. drivers fill up their tanks more cheaply and given consumers around the world some relief from inflation.
“Gas is not going to get cheaper,” Leon said. “If anything, it’s going to get a little more expensive.”
That the Saudis believe another cut is needed underscores the uncertain outlook for fuel demand in the coming months. There are concerns about economic weakness in the US and Europe, while China’s recovery from COVID-19 restrictions has not been as strong as many had hoped.
Saudi Arabia, the dominant producer in the OPEC oil cartel, was one of several members to agree to a surprise cut of 1.6 million barrels per day in April. The kingdom’s share was 500,000. That followed OPEC+ announcing in October it would cut 2 million barrels a day, angering US President Joe Biden by threatening higher gas prices a month before midterm elections.
Overall, OPEC+ has already cut paper production by 4.6 million barrels per day. But some countries cannot produce their quotas, so the real reduction is about 3.5 million barrels per day, or more than 3% of global supply.
Previous cuts have provided little lasting boost to oil prices. International benchmark Brent crude rose to $87 a barrel, but gave up its gains after the cut and has held below $75 a barrel in recent days. US crude recently fell below $70.
That helped U.S. drivers kick off the summer travel season, with gas station prices averaging $3.55, down $1.02 from a year ago, according to the AAA auto club. Falling energy prices also helped inflation in the 20 European countries that use the euro fall to the lowest level since before Russia invaded Ukraine.
The Saudis need sustained high oil revenues to finance ambitious development projects aimed at diversifying the country’s economy.
The International Monetary Fund estimates the kingdom needs $80.90 a barrel to meet its projected spending commitments, which include a planned $500 billion futuristic desert city project called Neom.
The U.S. recently replenished its strategic oil reserve — after Biden announced the largest drawdown of the national reserve in U.S. history last year — in an indication that U.S. officials may be less worried about OPEC cuts than in past months.
While oil producers such as Saudi Arabia need revenue to fund their government budgets, they also need to consider the impact of higher prices on oil-consuming countries.
Oil prices that are too high can fuel inflation, reducing consumer purchasing power and pushing central banks such as the U.S. Federal Reserve toward further interest rate hikes that can slow economic growth.
A cut in Saudi production and any increase in oil prices could boost profits that help Russia pay for its war on Ukraine. Russia has found new oil customers in India, China and Turkey amid Western sanctions designed to curb Moscow’s key energy revenues.
However, higher crude oil prices risk complicating trade for the world’s third-largest oil producer if they exceed the $60-a-barrel price ceiling imposed by the Group of Seven major democracies.
Russia has found ways to avoid the price cap through “dark fleet” tankers that falsify location data or transfer oil from ship to ship to disguise its origin. But these efforts add costs.
Under the OPEC+ agreement, Russian Deputy Prime Minister Alexander Novak said Moscow would extend its voluntary cut of 500,000 barrels per day until next year, according to Russian state news agency TASS.
But Russia may not keep its promises. Moscow’s total exports of oil and refined products such as diesel rose in April to a post-invasion peak of 8.3 million barrels per day, the International Energy Agency said in its April oil market report.
AP reporter Fatima Hussain contributed from Washington.